Chris DeMuth Jr. is the founder of investment firm Rangeley Capital LLC, which focuses on event-driven, value-oriented opportunities. He also heads up Sifting the World, one of Seeking Alpha"s most popular subscription services.
Chris recently took some time to reflect on the past year and look forward to 2018. He shares his thoughts with Seeking Alpha Editor Rebecca Corvino below.
Rebecca Corvino: Let"s begin with an overview of your investment style/philosophy. Has anything changed for you in this regard over the past year?
Chris DeMuth Jr.: I am a value investor. I seek to underpay as much as possible for securities relative to their intrinsic value. That has not changed. I doubt that it ever will.
RC: As an event-driven investor, what will you be paying attention to in 2018? Where will you be looking for opportunities?
CDM: I will be looking for opportunities in liquidations such as Retail Holdings (OTCPK:RHDGF), merger arbitrage targets such as Scripps (NYSE:SNI), and spin-offs such as New Fox (NASDAQ:FOX) (NASDAQ:FOXA). Overall, I will be paying attention to corporate transactions with enough complexity to disrupt the market"s normal price discovery process and to hide value.
RC: What do you expect to be the key driver(s) of stock market performance in 2018?
CDM: No one knows. I certainly don"t. Virtually all of my energy is spent at the firm level, analyzing specific companies and their corporate transactions. Short-term, absolutely anything could happen. Long-term, there will be a gradual reversion towards making sense. What might that look like? The U.S. market capitalization is about 142% of GDP; historically, this leads to prospective returns of about -2% per year. The Shiller P/E ratio is 94% above its historical mean, implying future annual returns of around -3%. However, mean reversion is rarely a smooth, steady process. It can be quite quick and dramatic.
RC: How does the political climate affect the risks and opportunities for next year?
CDM: The tax bill (which by the time you read this could be the tax law) offers new clarity on valuation of tax-sensitive corporations, especially banks. This could unlock a massive backlog in bank M&A. Which promising deal targets could get bought in 2018? Possibly all of them. BNCCORP (OTCQX:BNCC) should make the cut, but it could be among many deal targets. If small bank managements play their cards right, they could benefit from multiple deal premiums as regional acquirers get gobbled up.
President Trump has colorfully expressed his hatred of CNN and thus its parent company, Time Warner (NYSE:TWX), and its acquisition by AT&T (NYSE:T). More recently, he cheered on Fox"s asset sale to Disney (NYSE:DIS). This combination of reactions will be tricky for his antitrust enforcers to coherently navigate. But win, lose, or draw, early in the second quarter, we will hear back from the court on whether the Time Warner sale can proceed. This will offer a lot of clarity in terms of what other current and contemplated deals might get by the regulators. Vertical integration such as we see in the CVS (NYSE:CVS) acquisition of Aetna (NYSE:AET) could be heartened or disheartened by the decision. Today, Aetna"s sale trades at a $26.78 net spread, offering a 14% IRR if that deal closes by 2019. Its review is probably heading to the DoJ, which will be focusing on it right off of a big court win or loss.
RC: What"s your take on cryptocurrencies, and what does the price action in Bitcoin say about the financial markets in general?
CMD: Bitcoin is my favorite currency for 2017. I remain long Bitcoin via both purchases and mining. Bitcoin Cash could also do well as it becomes increasingly accessible next year. Ultimately, Bitcoin could make up a significant amount of the global money supply, so there is still plenty of upside. That being said, its recent combination of high volatility and high return is an aberration. Handling such a volatile asset demands sizing discipline (my view has been to hold 10% of cash in Bitcoin). You can learn more about mining here and can exchange Bitcoin into many alternative digital currencies here.
RC: In terms of asset allocation, how are you positioned heading into 2018?
CDM: There is always something to do, so I am bearish yet quite fully invested in specific mispriced securities. Equities are fairly expensive but credit is very expensive. On the other hand, with volatility so low, optionality is dirt cheap.
RC: What is your highest-conviction pick (long or short) heading into 2018 and why?
CDM: We are going to separately disclose our favorite long heading into 2018 first on Sifting the World. However, today I can tell you my favorite arbitrage opportunity: NXP (NASDAQ:NXPI). It is the target of a definitive agreement to get acquired by Qualcomm (NASDAQ:QCOM) for $110 per share in cash. It requires several outstanding regulatory approvals including EU, China, and South Korea. Those should come quickly and smoothly. It also requires that 80% of shareholders tender. That will not be quick or smooth. Today, somewhat fewer than 2% of shares have been tendered.
Qualcomm wants this deal for many reasons, including its relevance to Qualcomm"s overall strategy, potential synergies, and its role in strengthening Qualcomm"s corporate defense. To get from 2% to 80% will require a substantial price bump. The chance that $110 will cut it is 0%; at $150 per share it would be close to 100%. In between, it is simply a matter of what the buyer is willing to do to ensure the deal"s success. NXP holders are concentrated, organized, and convinced that their shares are worth far more than the current market price before any deal premium. The New Year could offer an opportunity to split the difference and move forward.
RC: Who will you be reading on Seeking Alpha in 2018?
CDM: On Seeking Alpha, I follow Andrew Walker and Ray Dalio. Check out Andrew"s podcast and Ray"s recent thoughts on the tax changes. On Seeking Alpha"s Sifting the World platform, I follow Reuben Miller and other fellow members.
Disclosure: I am/we are long RHDGF, SNI, BNCC, TWX, AND BITCOIN.
Additional disclosure: I reserve the right to make investment decisions regarding any security without notification except where notification is required by law. Disclosed ideas are related to a specific price, value, and time. If any of these attributes change, then my position might change. This post may contain affiliate links, consistent with the disclosure in such links.
Editor"s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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